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Ambuja Cem: Sales down on poor demand
May 3, 2013

Ambuja Cements has announced its results for the first quarter of the calendar year 2013 (1QCY13). During the quarter, the company's sales declined by 3.3% YoY while net profits increased of 56.3% YoY. Here is our analysis of the results:

Performance summary
  • On a standalone basis, net sales increased marginally during the quarter on account of sluggish cement demand.
  • Operating profits dipped by 27.6% YoY; operating margins declined from 28.4% in 1QCY12 to 21.3% in 1QCY13.
  • While other income increased by 44.1% YoY, interest and tax expenses decline by 21.2% YoY and 37.7% YoY respectively.
  • Despite lacklustre sales and weak operating margins, net profits increased by 56.3% YoY supported by non-operating performance and exceptional loss in 1QCY12. Net margins improved from 11.9% in 1QCY12 to 19.2% in 1QCY13.

Standalone financial performance snapshot
(Rs m) 1QCY12 1QCY13 Change
Net sales 26,315 25,448 -3.3%
Expenditure 18,845 20,039 6.3%
Operating profit (EBITDA) 7,470 5,410 -27.6%
EBITDA margin 28.4% 21.3%  
Other income 1122 1,617 44.1%
Depreciation 1,209 1,204 -0.4%
Interest 168 132 -21.2%
Profit before tax & exceptional items 7,215 5,690 -21.1%
Exceptional gain/ (loss) (2,791)   -    
Profit before tax 4,424 5,690  
Tax 1,301 811 -37.7%
Effective tax rate 29.4% 14.3%  
Net profit 3,122 4,879 56.3%
Net profit margin 11.9% 19.2%  
No of shares (m) 1535.1 1,542.5  
Diluted EPS (Rs)*   9.5  
P/E (times)   19.7  
*trailing twelve month earnings

What has driven performance in 1QCY13?
  • On a standalone basis, Ambuja Cements' net sales declined by 3.3% YoY during the quarter ended March 2013. The company reported sales volumes of 5.8 m tonnes, lower by 4.1% YoY (6.05 m tonnes in 1QCY12).

  • On the cost front, all major cost heads barring power & fuel costs witnessed pressure. While cost of power & fuel declined by 2.2% YoY (as a percentage of net sales), raw material costs, freight & forwarding expenses and other expenses increased by 3.3% YoY, 2.4% YoY and 2.7% YoY respectively (as a percentage of net sales). However, it must be noted that power & fuel costs were lower partially on account of Rs 245.4 m credited due to change in management estimate in respect of recognition of certain CENVAT credit pertaining to prior years. Similar credits were also made to raw material costs (Rs 0.2 m) and other expenses (Rs 45.6 m).

    Operating cost break-up
    (Rs m) 1QCY12 1QCY13 Change
    Raw materials consumed 1,858 1,763  
    Change in inventory  (204)    679  
    Total raw materials cost 1,654 2,442 47.7%
    % of Net sales 6.3% 9.6%  
    Employee expenses 1,030 1,208 17.2%
    % of Net sales 3.9% 4.7%  
    Power & fuel expenses 6,254 5,495 -12.1%
    % of Net sales 23.8% 21.6%  
    Freight & forwarding expenses 6,027 6,449 7.0%
    % of Net sales 22.9% 25.3%  
    Other expenses 3,880 4,446 14.6%
    % of Net sales 14.7% 17.5%  
    Total operating expenditure   18,845     20,039 6.3%
    % of Net sales 71.6% 78.7%  

  • Operating profits dipped by 27.6% YoY in 1QCY13. Operating profit margins declined from 28.4% in 1QCY12 to 21.3% in 1QCY13.

  • Other income rose by 44.1% YoY during the quarter despite a drop in other operating income and interest income. The rise was mainly on account of Rs 284.7 m written back towards interest on income tax relating to earlier year.

  • While depreciation charges remained almost at similar levels as 1QCY12, interest expenses declined by 21.2% YoY during the period.

  • The effective tax rate was substantially lower during the quarter on account of write back of income tax provision of Rs 1,171.7 m relating to earlier years.

  • At the bottomline level, net profit increased by 56.3% YoY. Net margins expanded from 11.9% in 1QCY12 to 19.2% in 1QCY13. However, it must be noted that the net profit of 1QCY13 is not strictly comparable with 1QCY12 as the latter quarter had reported exceptional losses of Rs 2,791.3 m arising on account of change in depreciation method on fixed assets pertaining to Captive Power Plants from the 'Straight Line' method to 'Written Down Value' method.

What to expect?

Ambuja Cement's performance during the quarter was adversely affected by the slump in cement demand on account of the overall slowdown in the economy. Moreover, realisations have come under pressure on account of excess cement capacity in the country. As such, the outlook for the cement sector for the short to medium term remains subdued. However, we expect the sector to grow at about 7- 8% over the next few years driven by demand for housing and infrastructure in the country.

At the current prices of Rs 188.2 the stock is trading at 19.7 times its trailing twelve month standalone earnings. Given the high valuations, we maintain our 'Sell' view on the stock from a 2-year perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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